September 2003

Gain Sharing Systems: Performance Risk or Reward?

C2B is in 6 sections this month

1. What is Gain Sharing?

2. How does it work?

3. Steps in Implementing a Successful Gain Sharing Project

4. The Public Sector (Government) & Gain Sharing

5. Large Corporations & Gain Sharing

6. Why do Gain Sharing Programs Fail?

Gain Sharing is a process of activity in which the employees receive regular cash payments (some companies pay monthly, some quarterly, and some only annually, depending on how feasible it its to produce cost and financial performance figures on a monthly or quarterly basis.)

These payments come out of GAINS that the organization has made through the joint efforts of managers and employees. These GAINS may be cost savings or improved income, or both.

An essential feature of Gain Sharing is that there are regular group meetings where employees and managers discuss how to improve performance, plan what to do, and in between meetings, they get on with it.

Gain Sharing was first introduced in the nineteen thirties, but we have improved a great deal since then. Today’s Gain Sharing Systems are usually Multi-Factor projects, where the financial payments to employees are earned by achieving improvements in specific areas (like reducing the number of plane trips that run late: reducing the volume of work that has to be done twice because of faults and errors: reducing the amount of waste material; etc.)

Dwayne D. Jakes, D.B.A., Dwayne D. Jakes & Associates Management Systems, LLC identifies five important steps to introducing a successful Gain Sharing System. These are.

1. Policy

2. Certified Management Consulting

3. Tailoring

4. Training

5. Implementation

The employer must decide on some key policy issues that are fundamental to Gain Sharing. One of these concerns the level of commitment that the organization is prepared to put into Gain Sharing. It is vital that the senior executives understand what is involved and are prepared to put in the necessary resources. Other policy decisions concern the objectives that the organization is seeking to achieve by introducing Gain Sharing; who will be included; how frequently the payments can realistically be made; and other basic features.

Once the policy issues have been considered the next stage is certified management consultation, at all levels. There may be more senior people whose permission will be needed before Gain Sharing can proceed. Certainly the organizations own managers need to be committed to Gain Sharing and they must be consulted to secure this commitment. Union representatives, who speak on behalf of the employee’s need to be consulted; so do the employees themselves; and not forgetting the supervisory levels.

The purpose of this Certified Management Consultation is:

v To explain Gain Sharing and make sure everyone understands what is involved.

v To listen to points of view and adapt the Gain Sharing system to complement your organization.

v To convince these people of the benefits of Gain Sharing.

v To win commitment to making a success of the project.

v To plan the next stages together.

It is very valuable to have an experienced certified management consultant to make or contribute towards the presentations that start off this consultation process.

The next step in the process is tailoring Gain Sharing by designing indicators and performance improvement factors which can be measured, which the employees can contribute towards, and which will lead to better financial performance for the organization. Here again and experienced consultant has a vital role to play in suggesting suitable indicators, advising known pitfalls, and keeping the process on track.

Once the Gain Sharing details have been designed and agreed, the success of Gain Sharing then depends on adequate training for managers, supervisors, and those employees who will take part in the consultative process of improving performance.

And the final stage, of course, is the implementation and monitoring. Holding the consultative meetings, measuring and giving feedback on performance, making sure the figures are being collected accurately, making sure the initial assumptions were valid, making the payments, monitoring to see when changes are needed to the performance indicators, and some twelve to eighteen months after introduction, it is wise to carry out a full review of Gain Sharing.

It has sometimes been said that Gain Sharing, like Profit Sharing, is not appropriate for the public sector. This is a misunderstanding. Gain Sharing is not about sharing profits; it is about sharing the benefits improvements.

There are plenty of examples of successful Gain Sharing projects in public sector organizations, particularly in the USA. The benefit of successful Gain Sharing include:

v Improving efficiency.

v Sharing the benefits of employee-supported savings.

v Improving relations & communications between managers and employees.

v Increasing employee understandings of how the organization works.

v Securing greater cooperation and involvement.

v Making specific performance improvements

v Improving use of resources.

v Increasing long-term viability of the organization.

v Improving job security.

v Changing the organization culture.

v Generating commitment to organizational goals.

Large corporations can inherit difficult communications or industrial relations problems. Situations can frequently arise which have the potential to generate communications problems and hostility between the large corporations and its employees. Even with the best intentions and skilled managerial ability, it is sometimes very difficult to make a large corporation run smoothly. Senior executives may feel misunderstood, or believe some employees have no wish to see the corporation succeed. In the worst scenarios, some employees may indeed “hate the boss”; others may have little faith in the ability of their managers. Gain Sharing has proved to be the way of improving these kinds of situations immensely. The benefits of Gain Sharing are not limited to helping corporations with problems.

Why do gain sharing programs sometimes fail?

Organizational Variables

1. Low trust of management.

2. Low accountability required of workers.

3. Low participation in decision-making.

4. Poor communications within and across departments.

5. Low commitment of workers to organizations.

6. Wage follower in industry.

External Environment

1. Unstable employment.

2. Unstable input (e.g., raw materials) or customer markets.

3. Highly competitive product market.

4. Highly regulated by government.

Financial Information

1. Poor tracking of financial information in firm.

2. Variable corporate profits over time.

The decision to establish an alternative reward system can be highly confusing. The sheer number and complexity of plans can be overwhelming at times. But as I noted earlier, policy, consulting, tailoring, training and implementation creates buy-in from executive management and they will ultimately decide whether or not Gain Sharing is a value-added ROI or Risk?